A Tool for Average Investors to Detect Public Company Accounting Fraud

If you're just an average investor, how can you pick up on whether or not a company is cooking its books?

Craig Newmark recently pointed to one of the neater ways in which someone might be able to determine if the numbers they're examining are following a natural pattern as opposed to an artificially-contrived one using Benford's Law, but unless you have access to reams and reams of internal company data, it's pretty unlikely that you as an individual without that kind of access could find out if something shady might be going on.

But for publicly-traded companies, you can get access to a company's publicly-reported financial statements, such as their annual reports or the 10-K statements they file with the United States Securities and Exchange Commission (SEC). And with that information, you can calculate a company's "fraud score" or "F-Score", which can provide a pretty good indication of whether or not the people inside the company might be manipulating their accounting.

Using math originally developed by Patricia M. DeChow, Weili Ge, Chad R. Larson and Richard G. Sloan in 2007 using data from 1982 through 2002, and updated in 2010 to include all years from 1982 through 2005, we've updated our tool for calculating the F-Score for any publicly-traded company for which you can obtain the indicated data here!

For that, you'll need consecutive years worth of the company's annual data - our tool- right here- provides that using Enron's data for the years 1998 (two years prior), 1999 (one year prior) and 2000 (year of interest).

a result greater than a value of 1 indicates a statistically higher than expected likelihood that the numbers the company in question has published have been misstated, which is "accountingese" for suggesting that the company's books may have been cooked! The following guide, developed by the F-score's creators, may be used to interpret the tool's results ("F-Score 1" corresponds to the specific model used in our tool):

Business News

Contact Us

About Townhall Finance

TownhallFinance.com makes available to the viewer a variety of independent sources that offer trading and investment advice and related services and products.

TownhallFinance.com does not itself offer, verify, sponsor, or promote, directly or indirectly, any investment or trading advice, or information or any product or service offered by these independent sources.

Every investor or trader should consider all advice and all offerings of products and services on their own merits and for suitability to the individual's personal needs and circumstances. Before using this site, please read our complete Terms of Service by clicking here.

Make TownhallFinance.com your premier source for stock market and financial market information. Individual investors enjoy our worldwide investor seminars and trading seminars. Our investment advisor seminars keep financial advisors up to data with CEUs, and this site provides investors, traders, and advisors with the latest stock market analysis tips, information and research tools. Be sure to be a part of our options day trading tips and picks from professional day traders and various trading, investing and advisor Webcasts and financial podcasts.